Pre-money valuation to all or investor!

CFA Level II Alternative Investments
#1

Why is the answer deducting the $200,000 to get the pre-money value? It is not specifying the pre-money to the investor, or the venture capital deal is referring to the portion of the investor?

EXHIBIT 1

VENTURE CAPITAL DEAL: INVESTMENT INFORMATION

Terminal value (at time of exit) $1,000,000 Time to exit event 3 years Amount of initial investment $200,000 Discount rate 40%

Q. Based on the information in Exhibit 1, the pre-money valuation of the venture capital deal is closest to:

  1. $364,431.
  2. $291,545.
  3. $164,431.
    Solution

C is correct. $1,000,000/(1 + 0.4)3 − $200,000 = $164,431.

A is incorrect because ($1,000,000)/(1 + 0.4)3 = $364,431.

B is incorrect because ($1,000,000 − $200,000)/(1 + 0.4)3 = $291,545.

#2

$1M is exit value

$364k is post money valuation

$200k the new investors money

Pre-money (before new investors came into play) is $364k-$200k = $164k

#3

Pre-money always means prior to the investment round in question. (In this case prior to the $200.000 investment)